At least Apple still has brand cachet and loyal fans to cushion the impact of commodity economics. Big Cannabis keeps taking the hit head on.
Aurora Cannabis Inc. (NYSE:ACB) plunged this week on what would have nominally been a great quarter. Revenue quintupled as the company’s dried agricultural product sales went into overdrive.
A few investors expected a little better, but any debate over whether this stock deserves a 33X revenue multiple and not 34X is really just fighting over right of way in a gold rush. Aurora and its peers are capturing massive market opportunities in real time.
The problem is that in order to get that 400 percent revenue growth, Aurora needed to grow 10 times as much cannabis. Prices per gram have cratered from nearly $9 to under $6.
That’s the tyranny of too many growers crowding into the market faster than demand is rising. Demand is carefully regulated. Anyone with a license and shareholder capital can build a greenhouse.
And until the cultivators figure out how to differentiate their product, every gram they grow looks more or less the same as every other gram. When supply expands faster than demand, prices go down.
Some people factored that into their growth models on these stocks. Other investors are only finding out now that while a cultivation license is still an excuse to print money, crop yields don’t stretch as far as they hoped.
I’m eager to add true differentiated companies to my Turbo Trader Marijuana Millionaire Portfolio. Aurora isn’t in there for a very good reason.
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